The article was insinuating something ridiculous about Blackrock secretly conspiring with global central banks to inflate asset prices.
Your argument is a more reasonable one to consider. I hear it sometimes (especially from underperforming active managers), but I haven't seen much evidence of it.
It's a seductive line of reasoning -- that passive funds are dumb money that buy at any price and therefore let stocks run up to unreasonable levels.
You could also take the other side of it though -- that active managers get caught up in manic buying that causes bubbles, but passive index funds are price insensitive and hold stocks forever, so they let companies focus on long-term growth.
I think there is probably a point where too much passive investing might make markets less efficient, but we're not close to that yet. There are still a lot of active funds out there. It was only last year that passive reached 50% of US equities. It's also probably self-correcting -- if markets become less efficient at price discovery, it gives active managers more opportunities to find undervalued stocks and generate more wealth, which will encourage more active management.
In practice I think they're just another type of investor.
It's not like that source of demand disappears without passive funds. If retail investors weren't putting their money in passive funds they'd be putting them in old school active funds like they used to do.
The decline in the number of public companies in the 21st century is a whole other can of worms. Smaller companies just don't go public as much anymore. I don't think you can attribute it to passive investing though. I think most of it has to do with two factors: (1) it is more expensive to be a public company today due to increased disclosure and compliance costs, as you stated, but more importantly (2) the market for private funding has matured with the growth in VC, PE, and private lending so companies can stay private longer.